Aer Lingus has set aside €32.5m to settle a mammoth tax bill for redundancy payments to more than 700 staff who were later rehired.

The airline confirmed it would not chase the employees to pay the taxes and penalties on the payout they received two years ago, but would instead make it an exceptional provision in its financial statement.

The carrier said it was deeply disappointed and frustrated after the Revenue Commissioners confirmed it planned to claim the money.

It has decided not to dispute the decision for fear it would cost the company and shareholders even more.

A total of 913 staff were let go by Aer Lingus in 2009 on the basis that severance payments would qualify as a redundancy.

This included rebates for Aer Lingus and termination of employment tax relief for affected staff. The average payout was €72,000.

The €32.5m relates to PAYE, PRSI, interest, penalties and related costs arising from payments to 715 of the staff later rehired for new roles with changed duties and lower salaries.

The company said: "Aer Lingus accepts that it gave assurances to staff at the time that any terminations of employment should qualify as legitimate redundancies and that staff members made their decision on the basis that any tax liability in relation to the programme would be limited.

"On this basis, Aer Lingus believes that it is inappropriate to seek to recover any amounts from staff.

"We are deeply disappointed and frustrated that the Group must now provide for and settle this liability.

"However, the Group believes that in taking this course of action, the potential financial costs are lessened, and as such, this represents the best approach for Aer Lingus and its shareholders, given the circumstances."

A spokeswoman for the Revenue Commissioners confirmed officers had been in discussions with Aer Lingus regarding the tax issues arising from their restructuring scheme for some time, but would not be commenting further.

Meanwhile the Department of Enterprise, Trade and Innovation has also questioned whether staff members who left and subsequently applied for new roles and returned to Aer Lingus should be considered to be redundant under the relevant legislation.

A spokeswoman confirmed no decision had yet been made in relation to paying Aer Lingus a rebate on payouts under the redundancy payments scheme.